Unilever PLC Half-year Report 2022

OUTLOOK

Our guidance for underlying sales growth in 2022 was previously at the top end of a range of 4.5% to 6.5%. We now expect underlying sales growth to be above that range, driven by price with some further pressure on volume.

We expect net material inflation for the year to remain high at around €4.6 billion with our forecast for the second half largely unchanged at around €2.6 billion. We will continue to invest in the health of our brands. In the first half, we increased absolute brand and marketing investment, and we will again invest competitively in marketing, R&D and capital expenditure in the second half. Our full year underlying operating margin expectation remains at 16%, which is within our guided range of 16% to 17%.

The medium-term macroeconomic and cost inflation outlooks are uncertain and volatile, but delivering growth remains our first priority. Against this backdrop, we continue to expect to improve margin in 2023 and 2024, through pricing, mix and savings.

 

FIRST HALF OPERATIONAL REVIEW

Our market context : High input cost inflation has been widespread across our markets, and it is expected to remain elevated in the second half. While Covid-19 restrictions have been eased in most markets, the lockdown in China affected consumers particularly in the second quarter.

In the majority of markets in which we operate, market growth was driven by price which had an impact on market volumes. Food service and out-of-home ice cream channels benefitted in markets which reopened after lockdowns in the prior year, although tourism has not yet returned to pre-Covid levels.

Unilever overall performance : Underlying sales growth in the first half was 8.1% with 9.8% from price and (1.6)% from volume. Growth was broad-based across all Divisions. Price has sequentially stepped up over the past two quarters, reaching 11.2% in the second quarter, which had, as expected, some negative impact on volume. This was more pronounced in Home Care, which was particularly exposed to rising input costs and took the highest pricing action, leading to underlying sales growth of 10.7%. Beauty & Personal Care grew 7.5%, driven by price and continued strong growth in Prestige Beauty and Health & Wellbeing, which is Unilever's vitamins, minerals and supplements business. Foods & Refreshment grew 7.3% with slightly negative volume at (0.9)%, although volumes were flat excluding ekaterra. Ice cream out-of-home and Unilever Food Solutions showed strong double-digit growth in the first half, compensating for lower growth of in-home ice cream.

Emerging markets grew by 10.0% with a 12.1% contribution from price and volume at (1.8)%, including an estimated adverse impact of around 70bps from the lockdowns in China. Pricing in Latin America was strong at 19.1% with volumes contracting by (4.8)%. South Asia grew strongly through both price and volume. Turkey delivered double-digit volume growth by managing dynamically through a high inflation environment. Developed markets increased by 5.5%, with 6.7% from price and (1.2)% from volume. North America grew 8.7%, helped by strong performances of dressings and our businesses in high growth areas such as Health & Wellbeing.

Turnover increased 14.9% to €29.6 billion, which included a currency impact of 5.6% and 0.6% from acquisitions net of disposals. Underlying operating profit was €5.0 billion, up 4.1% versus the prior year. Underlying operating margin declined by 180bps to 17.0%. Gross margin decreased by 210bps which reflected the very high inflation in input costs that was only partially mitigated by the strong pricing action and savings delivery. Brand and marketing investment was stepped up by €0.2 billion in constant exchange rates, which equated to a 40bps contribution to margin. Overheads increased by 10bps largely due to increased investment in business models with a higher overheads structure.

We completed the announced sale of our global tea business, ekaterra, on 1 July 2022. On 7 July, we completed the acquisition of a majority stake in Nutrafol, a leading provider of hair wellness products, which had been announced on 30 May 2022.

On 23 March, we commenced the first tranche of €750 million of the share buyback programme of up to €3 billion. As at 30 June, total consideration for the repurchase of shares was €648 million. This tranche completed on 22 July. It is our intention to launch a second €750 million tranche of our planned share buyback during the third quarter of 2022. This will be confirmed with a launch announcement in due course.

In January 2022, we announced a new, simpler, more category-focused operating model for Unilever organised around five Business Groups and a technology-driven backbone, Unilever Business Operations. The reorganisation is on schedule with the new structure in place on 1 July. We expect it to be achieved within existing restructuring plans, and to generate around €600 million of cost savings over two years, with the majority in 2023.

 

FIRST HALF OPERATIONAL REVIEW: DIVISIONS

 

	Second Quarter 2022				First Half 2022
(unaudited)	Turnover	USG	UVG	UPG	Turnover	USG	UVG	UPG	Change in underlying operating margin
	€bn	%	%	%	€bn	%	%	%	bps
Unilever	15.8	8.8	(2.1)	11.2	29.6	8.1	(1.6)	9.8	(180)
Beauty & Personal Care	6.4	8.0	(2.3)	10.5	12.2	7.5	(1.3)	9.0	(180)
Home Care	3.1	12.2	(3.8)	16.6	6.0	10.7	(3.4)	14.5	(200)
Foods & Refreshment	6.3	8.1	(1.2)	9.4	11.4	7.3	(0.9)	8.3	(170)

 

Beauty & Personal Care

Beauty & Personal Care underlying sales grew 7.5% with 9.0% from price and (1.3)% from volume. Strong price increases landed across most categories, and were particularly pronounced in Latin America, South Asia and Turkey.

Deodorants delivered double-digit growth, helped by continued premiumisation and strong innovations, such as the  72-hour protection technology launched with Rexona. Skin care grew low single-digit on the back of a strong prior year base, with strong growth of Pond's in India partially offset by a decline in China. Skin cleansing returned to growth, with Dove landing strong pricing and flat volume supported by the launch of premium innovations in North America. Overall skin cleansing volumes declined mid single-digit, particularly affected by the pricing in Europe and South Asia. Hair care grew mid single-digit, driven by India and North America, partially offset by declines in North Asia and Europe. Mid single-digit growth in oral care was driven by a strong performance in Indonesia with modest growth elsewhere. Prestige Beauty continued its double-digit growth momentum with Tatcha successfully launching in the United Kingdom and expanding in premium channels in China.

Underlying operating margin decreased 180bps as gross margin declined as a result of high input cost inflation.

Home Care

Home Care underlying sales grew 10.7% with 14.5% from price and (3.4)% from volume. Double-digit pricing landed across most geographies in response to very high increases in raw material costs.

Fabric cleaning continued its momentum, posting strong double-digit growth with marginal volume decline. The growth was broad-based across all formats, with strong contributions from OMO and Radiant. South Asia and Turkey achieved double-digit pricing and positive volumes, supported by the continuous development of the liquids market. Fabric enhancers grew mid single-digit with accelerated performance in the second quarter. Comfort continued its growth momentum in Brazil and China but faced declining markets in South-East Asia and Europe. Home & hygiene grew low single-digit with double-digit pricing offset by volume declines across most geographies. Household cleaner volumes declined as a result of a slowdown in consumers' disinfecting habits, while dishwash sales grew driven by India and South-East Asia.

Underlying operating margin declined 200bps driven by a substantial gross margin reduction partially offset by lower brand and marketing investment.

Foods & Refreshment

Foods & Refreshment underlying sales grew 7.3% with 8.3% from price and (0.9)% from volume. Pricing was broad-based and particularly high in dressings given the input cost increases.

Ice cream underlying sales grew high single-digit driven by strong growth in the out-of-home business which landed double-digit price and volume growth. Magnum and Cornetto continued their growth momentum supported by new variant innovations, while ice cream suffered from supply issues in the United States. In-home sales were slightly up, although volumes declined in Europe and North America where markets contracted as a result of some post-Covid channel switching by consumers. 

Foods also grew high single-digit with slightly negative volumes. Unilever Food Solutions, our food service business, landed strong double-digit growth and achieved sales above pre-Covid levels despite the severe China lockdown impact in the second quarter. In-home foods grew high single-digit driven by high pricing and marginally negative volumes, on the back of a strong comparator. Hellmann's delivered double-digit, price-driven growth, which was supported by its global purpose campaign “Turn nothing into something”.

Underlying operating margin decreased 170bps predominantly driven by lower gross margin.

 

FIRST HALF OPERATIONAL REVIEW: GEOGRAPHICAL AREA

 

	Second Quarter 2022				First Half 2022
(unaudited)	Turnover	USG	UVG	UPG	Turnover	USG	UVG	UPG	Change in underlying operating margin
	€bn	%	%	%	€bn	%	%	%	bps
Unilever	15.8	8.8	(2.1)	11.2	29.6	8.1	(1.6)	9.8	(180)
Asia/AMET/RUB	7.1	9.0	(2.6)	11.9	13.7	9.0	(1.1)	10.2	(90)
The Americas	5.4	11.7	(1.7)	13.6	9.9	10.4	(1.4)	11.9	(200)
Europe	3.3	4.6	(1.8)	6.5	6.0	2.9	(2.9)	6.0	(320)

 

	Second Quarter 2022				First Half 2022
(unaudited)	Turnover	USG	UVG	UPG	Turnover	USG	UVG	UPG
	€bn	%	%	%	€bn	%	%	%
Emerging markets	9.1	10.5	(3.1)	14.0	17.4	10.0	(1.8)	12.1
Developed markets	6.7	6.6	(0.9)	7.6	12.2	5.5	(1.2)	6.7
North America	3.4	8.9	(0.5)	9.4	6.2	8.7	0.6	8.1
Latin America	2.0	16.8	(4.0)	21.7	3.7	13.4	(4.8)	19.1

Asia/AMET/RUB

Underlying sales grew 9.0% with 10.2% from price and (1.1)% from volume. China declined low single-digit with the strong start of the year being reversed in the second quarter due to the Covid lockdowns that particularly impacted Unilever Food Solutions and Beauty & Personal Care. South Asia continued its growth momentum with strong pricing and positive volumes. Growth accelerated in the second quarter, driven by the performance of Home Care and hair care. Indonesia grew high single-digit, after another quarter of price-driven growth, supported by strong performance of oral care, deodorants and scratch cooking aids, but overall volumes were still down, most notably in Home Care. Vietnam landed high pricing and positive volumes across all categories. We have announced that we will no longer invest in Russia, but we will continue providing the local population with basic products. Our Russian business represented around 1% of turnover and had a minor negative impact on the growth of the Group. Turkey posted very strong, broad-based growth across all categories, driven by both price and volume. In line with our treatment of other hyperinflationary countries, the underlying price growth in Turkey was capped from the second quarter.

Underlying operating margin declined 90bps as a result of lower gross margin due to higher input costs. This was partially offset by the turnover leverage benefit on brand and marketing investment as well as overheads.

The Americas

Underlying sales growth in North America was 8.7%, with 8.1% from price and 0.6% from volume. Double-digit growth in Beauty & Personal Care was driven by strong performance in deodorants and Health & Wellbeing, including high growth from Liquid IV. Prestige Beauty also continued its growth momentum, helped by consumers returning to the offline channels. Foods & Refreshment grew high single-digit, boosted by strong sales in dressings and out-of-home ice cream. Customer service challenges persisted in the second quarter, largely due to labour availability.

Latin America delivered underlying sales growth of 13.4%, with 19.1% from price and (4.8)% from volume. All Divisions delivered double-digit growth. In the context of high double-digit pricing, volumes declined in Brazil, Mexico and Chile, while volumes held up in Argentina.

Underlying operating margin decreased by 200bps primarily driven by lower gross margin and higher overheads.

Europe

Underlying sales grew 2.9% with price of 6.0% and (2.9)% from volume. Growth sequentially improved in the second quarter, helped by out-of-home ice cream sales as the channel re-opened. Unilever Food Solutions also posted strong double-digit growth with sales exceeding pre-Covid levels, driven by extended distribution and price growth. The United Kingdom, France and Germany posted low single-digit growth with pricing largely offset by volume declines.

Underlying operating margin declined 320bps driven largely by lower gross margin as higher input costs outweighed pricing.

 

ADDITIONAL COMMENTARY ON THE FINANCIAL STATEMENTS – FIRST HALF 2022

Finance costs and tax

Net finance costs increased by €74 million to €227 million in the first half of 2022. The increase was largely driven by a higher cost of debt on bonds and commercial papers as well as higher other interest costs. This was partially offset by an increase in finance income from higher cash balances and positive rate variances. The interest rate on average net debt increased to 1.9% from 1.4% in the prior year.

The underlying effective tax rate for H1 2022 increased to 24.4% from 21.9% in H1 2021 due to changes in profit mix and the lapping of favourable one-offs in the prior year. The effective tax rate for H1 2022 was 26.8% compared with 22.7% in H1 2021. The 2022 figure included tax costs related to the separation of the ekaterra business.

Joint ventures, associates and other income from non-current investments

Net profit from joint ventures and associates was €97 million, compared with €91 million in 2021. Other income from non-current investments was €27 million, slightly down versus prior year.

Earnings per share

Underlying earnings per share increased by 1.0%, including a positive impact of 4.9% from currency. Constant underlying earnings per share decreased by 3.9%. The decline was mainly driven by lower margin, higher tax and finance costs, partially offset by turnover growth and a reduction in the number of shares. Diluted earnings per share decreased 4.7% to €1.13.

Restructuring costs

Restructuring costs in the first half increased to €359 million, compared to €306 million in the prior year. For the full year, we expect restructuring costs of around €1 billion, including those linked to the implementation of the new operating model. From 2023, restructuring costs are anticipated to be around 1% of Group turnover.

Free cash flow

Free cash flow in the first half of 2022 was €2.2 billion, down from the €2.4 billion delivered in the first half of 2021.  This decrease was due to higher cash tax and increased capital expenditure, partially offset by improved operating profit and working capital.

Net debt

Closing net debt increased to €27.1 billion compared with €25.5 billion at 31 December 2021. The increase was driven by dividends paid, the share buyback programme and an adverse currency impact, partially offset by free cash flow delivery.

Pensions

Pension assets net of liabilities were in surplus of €5.0 billion at the end of June 2022 versus €3.0 billion as at 31 December 2021. The increase was primarily driven by lower liabilities as a result of increased interest rates in the European Union, the United Kingdom and the United States. This was partially offset by investment losses on pension assets reflecting the declines in equity and bond markets in the first half.

Finance and liquidity

During the first half, the following notes matured and were repaid:

• February: €750 million 0.50% fixed rate notes, £350 million 1.125% fixed rate notes

• March: $500 million 3.00% fixed rate notes

• May: $850 million 2.20% fixed rate notes

 

The following notes were issued:

• February: €500 million 0.75% fixed rate notes due February 2026, €650 million 1.25% fixed rate notes due February 2031, £300 million 2.125% fixed rate notes due February 2028

• May: €650 million 1.75% fixed rate notes due November 2028; €850 million 2.25% fixed rate notes due May 2034

On 30 June 2022, Unilever had undrawn revolving 364-day bilateral credit facilities in aggregate of $7,215 million and €750 million with a 364-day term out.

Share buyback programme

On 10 February 2022, we announced a share buyback programme of up to €3 billion to be completed over 2022 and 2023. On 23 March 2022, we announced we would commence the first tranche of this buyback programme for an aggregate market value equivalent to €750 million. As at 30 June 2022, Unilever had repurchased 15,508,723 ordinary shares. Total consideration for the repurchase of shares was €648 million which is recorded within other reserves. The first tranche for an aggregate market value of €750 million completed on 22 July 2022. Between 23 March 2022 and 22 July 2022, a total of 17,802,472 Unilever PLC ordinary shares were purchased.